Posts Tagged ‘power of appointment’

Clients are often unfamiliar with the concept of a “power of appointment.” If they don’t know what it is, they can be excused for not knowing whether they have one, or how to use it.

Suppose Thomas leaves $10,000 to charities in his trust, but gives his brother Richard the authority to choose which charities. What Richard has is a power of appointment. Because Thomas says that only charities qualify, Richard’s power of appointment is said to be “limited” — in this case, limited to charitable organizations.

Now suppose that another portion of Thomas’s trust says that his other brother (you knew he would be named, Harold, didn’t you?) can decide how to distribute $10,000. Harold’s power of appointment could go to anyone — including to Harold himself. It is a “general” power of appointment.

As you can imagine, it would be good for Thomas to spell out what Richard and Harold have to say, or sign, in order to let the trustee know whom they have selected to receive their respective gifts. Since Thomas had his trust prepared by a capable lawyer (with a sense of whimsy), it says that “the power specified herein may be exercised by Richard delivering a signed, notarized document on blue paper to the trustee on a Wednesday before noon, Mountain Standard time.” Harold’s power of appointment is identical, except that it specifies green paper and afternoon delivery.

Can Thomas impose those (silly) requirements on the proper exercise of the powers of appointment he is giving to his two brothers? Of course he can — nothing in the law of trusts requires sober, businesslike language. The signer of a trust has considerable leeway to impose pretty much any technical requirements he (or she — or they) wish.

That’s the principle involved in a recent Arizona appellate decision. It involves a trust established by a husband and wife, and a power of appointment given to whichever spouse survived the other.

William and Mary Quick signed a joint, revocable trust in 1985. As is often the case, the trust was for their own benefit so long as both lived, and continued to be for the benefit of the survivor upon the death of the first spouse. One unusual provision was included in the trust, though: upon the death of the first spouse, the entire trust would become irrevocable, assuring that the couple’s two sons would receive everything upon the second spouse’s death.

The opinion does not explain whether William and Mary’s two sons were to receive equal shares under the trust’s default terms, but let us assume that they were. One thing the trust did provide, though, was that the surviving spouse would have a limited power of appointment, and could change the shares of the two sons after the first spouse’s death. The only requirement for exercise of the limited power of appointment was that it had to be done by a will, and that the will had to make specific reference to the power of appointment.

Mary died in 2003. A year later, William apparently decided that he wanted to change his sons’ shares of the trust. How did he do that? He signed a new trust document — a “restatement” of the trust — which altered the distribution shares upon his death. William lived for several years after the trust restatement was signed, but no further changes were made before his death, and he did not refer to his power of appointment in his will.

William was the sole trustee of the trust after Mary’s death. Assuming all assets were community property (which we don’t actually know to be true), half of the trust’s assets came from “his” share of the community. We can also reasonably assume that the trust permitted him, as trustee, to dip into the trust’s principal and distribute it to himself, at least in some circumstances. So was his failure to refer to the power of appointment in his will a problem?

One of the couple’s sons thought so, and a legal dispute was inevitable. Both brothers joined in asking the probate court for instructions: was William’s apparent exercise of his power of appointment valid? Should the trustee make distributions between them based on William and Mary’s original scheme, or rely on William’s restated trust document from after Mary’s death?

The probate court decided that what William had done was ineffective. Since the original trust became irrevocable on Mary’s death, and it required William to make any changes in his will, that was what was required. The original division between the two sons would be upheld.

The Arizona Court of Appeals agreed. It was not good enough that William almost did it right. Nor was it sufficient that William had the authority, and his wishes were clear. The trust required that the limited power of appointment must be exercised in William’s will, and that the will specifically refer to the power itself. William’s will did not exercise the power of appointment, or even refer to the original trust (or, for that matter, the restated version). Quisling v. Quisling, June 16, 2015.

Assuming, for the sake of education, that William really did mean to change the distribution shares of his two sons, what should he have done? The easy answer is that he should have followed the trust’s instructions: he could make the change by simply referring to the trust in his will, and no change needed to be made in the trust document itself.

Under Arizona law, though, that probably was not his only choice. William might have been able to “decant” the irrevocable trust into a new trust. He might have been able to withdraw some, most or even all of the trust’s principal and put it into his own name (and, subsequently, a new trust). He might have been able to avoid disputes by entering into an agreement with his two sons about how to handle the trust for the rest of his life and even after his death. But by simply restating the trust, without more, he failed to accomplish his goals. The lesson: exercise of a power of appointment must follow any instructions given with the power itself.

JULY 1, 2013 VOLUME 20 NUMBER 24
Sometimes things just don’t work out the way you intend. That is hardly a novel observation, but it can have a big effect on the work you hire a lawyer to do for you.

Let’s try an example. Suppose that you want to give some money to your grandchildren. You have four grandchildren, aged 10 through 17. You are planning on setting aside some money for education and to get them a start in life. You have done well in life, and are ready to put money aside right now.

Though your grandchildren are uncommonly smart (aren’t all our grandchildren above average?), they are pretty young. You agree with your lawyer that their money should be put in trust. You want to get the gifts completely out of your estate, however, so you decide to create irrevocable trusts — one for each grandchild. You ask your lawyer to draft the trusts, and you and your spouse intend to put $28,000 per year into each trust, at least as long as you are able to afford making the gifts.

The trusts are drafted; they name each grandchild’s parent (your daughter as to two of the grandchildren, your son as to the other two) as trustee. The documents are pretty much identical, and each is about twenty pages long. You have read them, but they are pretty hard to follow — though your lawyer has given you good advice about what they say. Did we mention that your lawyer is your son-in-law, the father of two of your grandchildren? He is very smart, and you know that he has thought through the provisions of the trust. You and your spouse sign, and you write the first of several annual checks to the respective trusts.

Four years go by. You by now have made $100,000 gifts to each of the grandchildren’s trusts. That is when you learn that your daughter and son-in-law are getting divorced. It’s unfortunate, but you are glad that you had the foresight to name your daughter as sole trustee rather than making her husband a co-trustee for their grandchildren.

Five years later, you have been making regular contributions to the trusts and they have grown significantly. Your grandchildren got scholarships for college and stayed close to home, so most of the money is still sitting there. Your family situation has gotten a little more complicated, though: your former son-in-law has remarried and had two more kids, and he (and they) is pretty much out of your daughter’s life. Your son has also gotten divorced, but neither he nor his ex-wife has remarried.

Before the next installment, we feel constrained to remind you that this is your imaginary life. Your oldest grandson, now age 27, married, and making his way in the world, dies in a terrible auto accident. His trust had grown to over $200,000; what is to become of that money?

Look at the trust document. It says that your grandson had something called a “power of appointment.” That means he could have written a will designating who would receive the trust’s assets, but of course he did not make any will at all. What happens if he dies without a will? The trust says his money goes to his children, if he has any (he did not). It says nothing about his wife. The remaining money, it turns out, goes to his siblings.

But that means that two-thirds of the money you gave to your grandson would go to your former son-in-law’s children by his second wife. Surely that can not be what you intended. It hardly even seems likely that your former son-in-law had any such idea in mind when he wrote the trusts a decade ago. Is there any way to prevent the money from going to these children you don’t even know, and are not related to?

That story is a slimmed-down and somewhat sanitized version of a recent North Dakota Supreme Court case. It gives us a chance to write about not only the job of being a lawyer, but also the concept of court reformation of trusts.

One of the odd things about being a lawyer is the need to think through the many various ways that bad things could happen to our clients, whom we usually like very much. That’s also the reason legal language often seems so stilted and awkward; we are trying to clearly convey meaning in an uncertain future world. One convenient way to provide for future changes is to give trust beneficiaries (in appropriate cases, of course) the power to designate to whom trust monies will be given upon their own death. That power to appoint the trust to another person is a “power of appointment.” It can be general, or it can be limited (as in a power to appoint only to the beneficiary’s spouse, issue, parents or siblings, or only to charitable organizations, or only to beneficiaries named Dave, or whatever).

Effective use of a power of appointment, of course, requires the holder of the power to do something. That also explains why, when you make an appointment to talk about estate planning with a lawyer, she wants to know if you are a beneficiary of any other trusts, and to see the trust document(s); she is looking for powers of appointment that need to be exercised.

But back to our scenario: is it possible to convince a judge that you never intended family money to go to non-relatives? That you simply could not have imagined the sequence of events that played out back when you first signed those trust documents? Yes, as it turns out. Though the probate judge in the North Dakota case refused to allow reformation of the trust, the state Supreme Court reversed that holding and authorized a change to name only the deceased grandson’s siblings who were also descendants of the original trust creators. In Re Matthew Larson Trust Agreement, May 28, 2013.

Wise legal commentator Yogi Berra is often quoted for the legal maxim that describes how complicated a lawyer’s imagination must be. Turns out it wasn’t him, but probably was physicist Niels Bohr, who said “prediction is very difficult, especially about the future.” Bohr certainly was the source for this appropriate observation about the art of physics and lawyering: “an expert is a person who has found out by his own painful experience all the mistakes that one can make in a very narrow field.”

Lucille Lucareli had three sons: Les Lee, Leigh and Robert. She owned her home in Racine, Wisconsin, and not much else. In 1996 she gave her son Les Lee a durable financial power of attorney, and she also took some steps to plan for the possibility that she might have to move to a nursing home at some point.

The problem facing Ms. Lucareli is a common one. Although she could qualify for Medicaid assistance with her long-term care if she did move to the nursing home, the state would begin to accumulate a claim against her estate. After her death, the state’s claim could prevent her sons from receiving the family home, or at the least could mean that they had to pay off her nursing home costs before the home could be transferred to them.

Ms. Lucareli could qualify for Medicaid assistance while still owning the home, since federal law requires that the state not count the value of the home in determining eligibility. On the other hand, if she gave the home outright she would be ineligible for Medicaid help for up to three years.

Ms. Lucareli decided to take advantage of a popular planning technique: she transferred her home to her sons immediately, but retained the power to change her mind later and exclude one or more sons. She did this by retaining a “power of appointment” over the home, exercisable by a written instrument any time before her death. This approach, she thought, would get the home out of her estate (so Medicaid would not have any claim against it), but not affect her Medicaid eligibility. In Arizona, many practitioners use another similar technique, preparing a deed which retains both a life estate (that is, the power to reside on and use the property for the life of the original owner) and a power of appointment. A similar approach is sometimes referred to as a “Lady Bird” Deed in some states.

There were at least two problems with Ms. Lucareli’s approach. First: she didn’t actually complete the transaction herself; her son Les Lee signed the deed on her behalf using his power of attorney. Second: according to the court decision rendered this week, Wisconsin law does not recognize this type of power of appointment.

A month after the transfer of Ms. Lucareli’s home, she apparently became unhappy with her other two sons. In September, 1997, she signed a document exercising the power of appointment and removing sons Leigh and Robert from the home title, and leaving the home to Les Lee alone. Upon her death Les Lee sued his brothers, asking for a ruling that the property was his alone. The trial court disagreed, holding that the transfer was invalid and the power of appointment meaningless. The Wisconsin Court of Appeals ordered that the property be divided into three equal shares. Lucareli v. Lucareli, May 17, 2000.

The significance of the Lucareli case is broader than the family squabble between brothers. This decision casts doubt on one of the most popular and effective mechanisms for protecting the family home against future nursing home costs. It is not yet known whether the same result will be reached in Arizona or other states.